Crude Oil: Price Wars

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Includes: BNO, CRUD, DBO, DNO, DTO, DWTI, FORX, OIL, OLEM, OLO, SCO, SZO, UCO, UDN, UDNT, USDU, USL, USO, UUP, UUPT, UWTI
by: Jack Malone

Summary

OPEC cut its forecasts for price growth and global demand for oil.

Draghi and the ECB set to continue stimulus for at least two years- bullish for the dollar.

More oil is above ground than ever before.

The Crude Oil market has taken center stage in the media and in the markets as WTI crude is trading at the lowest levels since 2009. The drop in oil prices is both a supply and demand story as world growth is slowing and we are pulling more oil out of the ground than ever before. OPEC was once the biggest influence in the energy markets but has seen its impact drop amid the US shale boom. On 11/06/2014 OPEC slashed forecasts in its annual World Oil Outlook for the price growth and global demand for oil which sent WTI lower as you can see on the chart below. OPEC is set to come together for an annual meeting on November 27th, 2014 and this should shed some light on their plans moving forward.

Many expected Saudi Arabia to step in and stop the oil slide by reducing their production. They have not done so and have actually increased production. The belief is that they will engage in a price war to protect their market share and shake out high cost oil projects. News out on Tuesday, Nov 4th that the Saudis were raising prices to Europe and Asia and lowering prices to the US spiked the WTI and brent markets but the rally was short lived. A fire at a Saudi oil pipeline on Wednesday, Nov 5th also sent the markets higher but soon dropped when it was released that the fire was not terrorist-related. Geo-political risk has always had an impact on markets but today it is much less so with the US producing at an impressive clip.

Oil has seen downside pressure from the supply/demand situation as well as strength in the Dollar. Oil will take its cue from the dollar which watches closely what the ECB is doing. The ECB statement out 11/6/2014 did nothing to change the trend of dollar strength and euro weakness. Mario Draghi stated they will continue stimulus for at least the next two years. This news coupled with the Japanese quantitative easing give the dollar no reason to slow its bullish tone, thus the dollar should offer a counter balance to any bullish oil developments. The chart below shows the inverse relationship of WTI oil to the dollar. Everything else being equal, as the dollar gains strength, energies priced in the dollar will see downside pressure.

Personally, I am in the bear camp for oil prices. News that Libya's biggest oil field will restart producing oil is another factor that will keep the supply glut going. Pending events like the Keystone Pipeline, the lifting of the US export ban on crude oil, or a sale out of the SPY oil reserves could also keep the bears in control. In my opinion, the option skew on WTI is out of whack at current time with puts more expensive than calls. Traders sharing a bearish outlook can look to short futures around this week's support near $78. Instead of being naked futures only, selling a put and buying a call will allow you to take in some premium while reducing your delta on the position.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.